Financial Analysis Toolkit
Quick Reference Guide - Financial Statements
The financial statements of a company can provide you with critical insight into the objectives, strategy and financial performance of the entity.
The income statement presents the performance of a company for the period under review. It is typically disclosed by showing all revenue or income sources subtracted by all costs or expenses to arrive at net profit or earnings. The income statement can be shown as a triangle as revenue is decreased by different categories of expenses until net profit (earnings) is derived.
Sales
Less: Cost of Sales
Gross Profit
Plus: Other Income
Less: Operating Expenses
Operating Income
Less: Tax
Net Profit
The balance sheet is a summary of a company’s condition at a particular point in time. A balance sheet consists of three components:
* Assets – what the entity owns
* Liabilities – what the entity owes
* Equity – the net worth of the entity (net asset value)
Assets are always equal to liabilities plus equity. Another way to consider the accounting equation is to say that equity (net value of the business) is equal to the assets (what is owned) less the liabilities (what is owed).The balance sheet:
Liabilities
Assets
=
+
Equity
Assets are items that the company owns, from which it expects to create value in the future. Assets represent a company’s deployment of available resources into cash generating investments or working capital. Different assets provide different levels of earnings.
Liabilities are present obligations on amounts owed to others. Liabilities represent a company’s source of debt funding. Liabilities have different maturities (short term or long term) and different cost structures (interest rates).
Equity is the shareholder’s interest in a company. It is also called net asset value, as it can be derived by subtracting what the entity owes (liabilities) from what it owns...